David Owen, author of The First National Bank of Dad, talks with EconTalk host Russ Roberts about how to educate our children about money and finance. Owen explains how he created his own savings accounts for his kids that gave them an incentive to save and other ways to teach them about postponing gratification, investing, keeping money in perspective and other life lessons. The conversation closes with a discussion of the value of reading to your kids.

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0:36

Intro. [Recording date: May 1, 2012.] Russ: To discuss: Owen's book, First National Bank of Dad. People tend to think about economics as being about money. It's something that frustrates me as an economist, that people on an airplane if I tell them I'm an economist will ask me for advice about the stock market or tell me that must be handy during tax time. And of course, I don't know a lot about the stock market; and I pay someone to do my taxes. But there is a part of economics that is about money. Obviously transactions and investing and saving are also about money, and those have to do with economics. What I also like about money, and about your book, is that it reminds me of what a student told me, that she had heard from a former professor: that economics is the study of how to get the most out of life. And this book, while about money, is really about helping our children get the most out of life. And that would help us, too, as parents. The National Bank of Dad, which the title of your book comes from, is your way to encourage your children postpone pleasure and to learn about savings, which is a very valuable skill. So, how does the National Bank of Dad work? Guest: Well, what happened, the story was that when my daughter was very little, I did the thing that parents always do, and when she was about 3 I took her down to the bank and made a big show of opening a savings account for her, with a check for $100 and then explained how the banking system worked. And, uh, essentially explaining that if you leave this $100 there for a year, but basically until you are in kindergarten, it will yield enough interest for you to buy a pack of gum. She wasn't very interested. Russ: Blew her away. Guest: And she was even less interested when she discovered that though this $100 was technically hers, I wasn't going to let her put her hands on it. And I attributed her lack of interest to, you know, to youthful immaturity and irresponsibility and all the things that parents usually accuse our children of. It was only later--unfortunately it was only several years later--that I realized that her disappointment was not about her ignorance about money but about her acute understanding of it. And that she was getting a raw deal; and it didn't make any sense. Russ: And that was because the interest rate was remarkably low? Guest: Remarkably low, even if you are a grown-up. If you are three years old, and a year is a thousand years away; and most of the things we tell our kids: you have to save money so that you can go to college when you are older. So that you can leave your mother and father and live in a faraway place with people you don't know and go and study very hard things, much harder than kindergarten. None of these things-- Russ: It's a real turn-on Guest: --work for children like an incentive. I think the underlying lesson economics is that people are rewarded for doing, even if we want to use economics for doing things, there have to be rewards. Seem like rewarding them, even rewards for them. I think that was the insight that I ultimately had after years of thinking about it: The reason my kids weren't interested in the banking system as I presented it was that there was nothing in it for them. And where that led me was to think: How would I do this in a way--how would I give them incentives that would seem like incentives to them? What I ultimately decided was that their money had to grow at a rate that they noticed it growing. Things had to happen on a time scale that seemed reasonable to them. And what I ultimately did was create a bank account in my house, a savings bank, in my house, in which I paid them an interest rate of 5% a month on their deposits. That works out to an annual percentage rate of something like 70%. And, I sat them down; they were 6 and 10, and roughly explained this idea. My son was 6. He wasn't even doing arithmetic really yet, and yet he immediately grasped the idea of interest, and compound interest. He gathered up all his change and put it on my desk and said he wanted me to credit him today. Because what I had explained to them-- Russ: Get it working. Guest: Get it working. Money in there. What he called charging up. He wanted to leave his money in his account for a while because he spent any of it. And, the basic idea was that if we give children incentives that seem like incentives to them, they will do what human nature tells them to do. I think the general lesson is that it's better to harness human nature than to change it; and I think most of what parents do when they try to teach their kids about money has to do with changing, thwarting human nature, bending our children to our will rather than doing what we claim we are doing, which is just to teach them about how money works.

6:31

Russ: And how did the Bank of Dad work out? Guest: It worked extremely well. They both caught on. And what I would do was put both their allowances in in Quicken each month. And then at the end of the month I would apply my 5% interest rate. And their balances would increase. Russ: As long as they didn't withdraw. Guest: Whatever the balance was--the 5% would apply to whatever it was at the end of the month. And they understood that if they left that money or some of that money in, that the 5% the next month would apply to that as well. This was my son's intuitive understanding of compound interest. He decided that what he would do is he drew a picture in which he said that he was going to invent a potion, a great-flavored potion that would make him live for a very, very long time, and he would deposit his money, and then after the end of this very long time he would have a trillion dollars or something like that. He had a line of trucks hauling off his fortune. It had built up over that time. And, uh, they understood it; and immediately they both became savers. I think what we usually do with kids--I know my kids felt this way--that if a kid gets $5 in a Christmas stocking, say--they view that as real money. If they get a check for $100, they know their parents are going to grab it and stick it in some account someplace that they won't have any access to. So, $5 is real money; $100 is not. To receive cash, you either have to hide it from your parents, or do what my kids used to do, which is to say: I want to be taken to the mall right now. I want to convert this into something you can't confiscate. Russ: Get it into hard form. Guest: And once the Bank of Dad was in place, their feelings changed about it. The other element in addition to the high percentage rate, was that they had to have control over their money. So, when they came to me and said, I want to take $20 out of my account in your bank, there was no question to ask. I would give it to them. That didn't mean that the rules of the family had been suspended; they couldn't go out and spend it on firearms or drugs, and they couldn't, just because they could afford it, eat candy whenever they wanted to. All the family rules still applied. But if they wanted to spend their money on something foolish, as they sometimes did, that was their decision. And I think that was an important part of it, too, because I think we learn about money the way we learn about anything, which is by making a series of gradually less catastrophic mistakes, and eventually by trial and error seeing what works and what doesn't. In families where kids really don't have their own money or where they have to beg for every dollar they spend and ask for it, they have no incentive to think about the consequences of buying something dumb, because they have no control. Money magically appears and disappears; when they have it, they should get rid of it, because the only way to get more is to be out of it. And so, I think once my children had their own money-- Russ: Like running a government agency. Guest: Yeah. Russ: Don't leave any for next year. Guest: Or being the CEO of a public corporation where if you just skim a tiny bit off the shareholders' equity, nobody will notice; you can fly around to your golf game in a corporate jet. We tend to be very careful when we spend our own money; we're much less careful when we spend other people's money. And that applies to kids too. My kids, when they were young, couldn't have been more reckless when they were spending my money, but when they were spending theirs, they were very thoughtful. When we went on vacation, I used to give the kids souvenir money--here's some extra money for the vacation; here's $20--but I would give it to them before we left, and I would just add it to their bank account. And I would say: Here's $20; it's your extra vacation money; you can spend it on anything you like--souvenirs. Or you can spend it now; you can save it till later, anything, whatever you want. But while we are on vacation, I don't want you to ask me for money for junky tee-shirts or anything like that. And then, because it was theirs, they were far less likely than the average kid to want to do something dumb with it. There was a situation where we went with some friends to a souvenir store and one of the other children, who was a close friend of my son, made a big scene. There was a rubber tomahawk. Russ: Some hideous thing that they had to have. Until they have to pay for it. Then it's-- Guest: Exactly. And he got it. He made enough of a scene that his father decided that the simplest thing would be to cave; the thrill of the hunt was over and the child lost interest in the tomahawk, which then immediately broke. But my son knew that it was futile to get into that sort of conversation with me because he had his own money, and he slowly and carefully studied the very unpromising merchandise in this store, and then he actually decided that he wanted to buy an unopened geode for $.33. Russ: A stone. Guest: Right. So he could crack it open. A stone with jewel-like crystals inside it. The geodes were actually selling 3 for a dollar, but he actually negotiated with the woman who ran the store; he wanted her to break up a set and sell him just one of them for $.33, because he thought the two extras were superfluous. And I didn't take any part in that negotiation. And he succeeded. She sold him one geode for $.33, and that was what he spent. I'm sure that if I'd been willing to buy him a tomahawk he would have been happy to have one of those, too. But because it was his money he was much more thoughtful. I think the interesting thing about that was we didn't have to have any discussion about this. We didn't have to talk about the value or the lack of value of cheesy merchandise or the importance of judging your purchases. It's obvious. Kids understand it intuitively, from a very young age. They understand how money works. That's why they don't like the systems we put in place for them. And left on his own he did very well, even though he was extremely young.

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Russ: The part I like about it especially is the lack of debating. One of the things that distresses me sometimes when I am watching people is they are negotiating with their children; and they start off saying no and then end up saying yes. You are better off saying yes right away, it seems to me; or no the whole time; but the no-yes encourages the future debating session. Maybe the parents like it. I dislike it; I think most parents do. Our very first podcast episode that we did on EconTalk was with my friend Don Cox at Boston College on the economics of parenting; it may amuse some of you who haven't heard it to go back and hear, Number 1, Don, who is a great, insightful parent; but also my interviewing style, which has changed over the years. But he had a similar insight about letting children do what they want when it wasn't very harmful; and they learned lessons and he didn't have to negotiate constantly. So, I think that's one of the great advantages of this approach. Guest: Yeah; and you still have to be careful. I think if you know that disaster lies ahead--if I 5-year-old wants to buy something that is really beyond her ability to care for. Russ: Enjoy. Guest: I think you have to step in. But I think it's better if we resist our urge, to spare our children these educational experiences. My son at one point bought--he was interested in trading cards and he bought a big box of basketball cards, like $50 or something like that. It was crazy. But he didn't realize it was crazy until after he'd done it, and sort of weighed the satisfaction he had received from opening these umpteen packages of basketball cards. Which is a very short-lived little thrill compared to what he could have done with the $50 if he still had it. But you can't teach that lesson in the abstract. It's something you have to do yourself. And then it sticks with you for a long time. I remember when my kids got their drivers' licenses. I hoped, the way parents always do--you want your kids to have a frightening but not dangerous accident of some kind, because they don't pay attention until they have some kind of a fender-bender. You don't want anybody to get hurt. But you need to--it was certainly true in the case of both my kids that they didn't understand the complexity of driving until they had screwed up. Russ: Yeah, I try to contain that by the screaming and the clutching of the dashboard and the writhing to suggest they are in the wrong lane. It's a subtle signal. The body language I think is particularly effective, you are screwing around in the seat to suggest that maybe you shouldn't be driving on the curb, as you are yelling. Guest: Check the mirror before you change lanes.

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Russ: I'm going to give a counterpoint to your position. I want to say, before I do: This is a lovely book. It's beautifully written; it's amusing; and it's full of insight about parenting and money. I had the privilege or lack of privilege of reading it after--I have four kids, all now 12 and older, 12, 14, 17, and 19--so many of them, their attitudes toward money have been set in place in some dimension, at least. Although I think when you go out and work for the first time, earn a real paycheck, pay taxes, other educational lessons do kick in. My wife and I treat money and our children very differently than you did. What I'm going to say now, even though we do it differently, I think what you did was glorious. I would have been happy to have done it with my children; I'm not sure my wife would have gone along with it. In a way, the fact that we did something radically different and got similar results, or results we're happy with--could be confirmation bias; I'm just fooling myself--but I think the more important point is: You have to have a consistent attitude at a minimum toward how you treat money with your children. This attitude of negotiating is really the single worst thing you can do. So, in our house, our kids had very little control over their money. We did squirrel away, as you said; we lectured them a lot about how money worked, or I did, being the econ teacher, and told them a lot of things that probably didn't sink in because they weren't experienced. Just told them about diversification and other issues we might talk about in a few minutes. But what I found interesting was that when we proposed that we might go see Wicked as a family, my kids said: Well, how much do the tickets cost? And I said it's expensive. But I'm thinking to myself: Well, they're not paying for it. Some of my children have a lot of interest in the level of things; I thought they were just curious. They wanted to find out about the world. I said: They're about $90 apiece. Well, let's not go. And I said: You're going to really like it; it's a great musical, and I think it's worth it. Oh, but if we go, then the next thing you're going to say: No, we just went to Wicked. So, they understood it was our money and they would pay some price. In fact sometimes when we give our kids money to go buy stuff--they go out to a baseball game with their friends, they come home and return our money and say it just wasn't worth it; the soda was too expensive or whatever it was. So, maybe I'm lucky, but we've had a consistent attitude toward money, and our kids are not spendthrifts. And they like to squirrel their money away, too. Makes me wonder whether it's all genetic. Guest: It may very well be. And I think you are right that consistency is critical. And also that, I'm sure there is a genetic component, a luck component, and there's also, if you love your children, you can screw up in all kinds of ways. Or you can do things differently in lots of ways and end up in the same boat. And I know that if you have a dysfunctional household, no matter what you do, it's not clear that anything is going to work. There are issues that are deep below. Russ: And I think your method of an artificially high rate of interest to teach the value of saving really teaches the deeper message I mentioned at the start, which is delaying of pleasure, gratification--the urge to take your money, which adults have as well, and buy something pretty and shiny and satisfying for a brief period of time that may not last as a true source of satisfaction, is very important. Guest: I think when we tell kids about saving we tend to stress the deprivation side of it and not really explain that there's something on the other end, too, and not really explain to the kids that behind that high rate of return, was something they could see--that if they delayed that gratification they could actually increase their satisfaction. And that's the way you and I think about it. We're not saving for retirement--assuming that we are--just because we want to make things hard on ourselves now. We're doing it because we think that in the long run we'll have more net pleasure from our lives than if we didn't. Russ: Yeah; it's not only about building character. Elusive value that is not so obvious, certainly when you are 13 or 14. This is good for you. I don't like it! This is good for you. I don't like it ! So, if you say: Because you are going to like it even more later, you have a shot, at least. Guest: There's a downside to success, too, which is as my kids got older and became successful savers, and especially as my daughter got to be babysitting age, 5% a month became unrealistic, and I had to explain to them that the law of supply and demand applied to the law of supply of money as well. And announced that I was reducing my monthly interest rate to 3%. They squawked at first, but then they understood the need for it. Russ: They didn't have a better alternative, either. Guest: No, they did not. And by that time they had seen how it worked, and they had accumulated significant balances. I think it should be said that it's easiest to teach kids about money obviously when there's money in the family, but not when there's too much and not when there's too little. I think money is the hardest where money is very tight; and in situations where money is essentially boundless. I think it's hardest for the poor and the rich to teach their kids about money. The first because poverty is not much of a teacher. There's not much to learn; it's all necessity. And at the rich end, it's hard to create the kind of artificial scarcity that you need to make decisions seem as though they mean anything. It's easier in the middle. Russ: Where most of us are. Guest: Even if we dream about winning the lottery.

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Russ: Let's talk about the stock market. You did an interesting--there are many pages of the book that I found more inspiring and moving than the one I'm going to mention, but my favorite intellectual part of the book was the critique of the way that modern schools teach their students about the stock market. Tell us what's wrong with that--which I confess to agree with about 173%--and then talk about what you did instead. Guest: Well, remind me if I forget anything, but at the time I wrote the book, the stock market was all that anybody talked about, because the stock market was raging. Everybody was getting rich. And what schools tended to do was have a pretend stock market, where kids would make imaginary investments and then you would gauge it a month later or at the end of the marking period and see who was ahead. Russ: A contest. Guest: Exactly. And that kind of contest teaches everything wrong about investing. It is not the way Warren Buffett does it. And it encourages a sort of all-or-nothing gamble, where you want extreme volatility; you are only worried about a month from now; it encourages you to roll the dice. I guess if you have the right set of nerves for it, there are people who make a living doing that. But it's not really a very good lesson to teach children about life skills, investing in the stock market. Russ: It's the worst lesson. Guest: The worst possible lesson. I think the other difficulty is when you try to do it a different way, and say: Make a real investment in the stock market, but have $10. And I don't know what fraction of a share of Apple that is today, but it's a very small one, and it leads to complexity. So, I was thinking: How do I talk to my children about the stock market and let them take part in this without either creating a worthless fantasy, and counterproductive game, or annihilating any possible returns. Even a $5 commission on the purchase of a single share of stock would wipe out any gain they could expect over a reasonable period of time. And so what I did was create a kind of shadow market, where you used real stock prices but converted dollars into pennies. So, if a share of stock on the NY Stock Exchange was selling for $40, it sold for $.40 on my stock exchange. And the kids could invest what they wanted to. I took the other side of every transaction. There were no actual orders going in to the desk at Charles Schwab. It was all just a paper stock market. But it was all based on actual prices. It seemed like a simple way to let them get involved in buying stocks or mutual funds or whatever they wanted to buy. Russ: I like the way you said--describe how you started it, which was kind of cool. You had a $250 seed fund from grandparents, right? Guest: Right. Russ: Tell us what you did with it. Guest: I have to see if I can remember, but I thought they really had to be pushed into doing this. You may need to tell the story, because it's been a while. Then I'll give you a caveat at the end. Russ: Okay. So, you went out, if I remember, and you took 6 stocks you thought they'd have some awareness of--one was Intel, because that was inside their computer; one was Microsoft; the Gap, where some of their clothes were from; McDonald's where they'd eaten a hamburger. So, they had some familiarity with the companies. And you endowed them with $250 worth of those six companies. That was interesting; you could have just given them a free start--it was kind of a free lunch--but you realized that there are so many stocks, so many bonds, that it would be overwhelming. So, you start with these six. And then you said: You can exchange among the six or if you want, sell them all back, start anew if you want. But you gave them something that they had some connection to. Guest: Good memory. The sort of psychological barrier to entry would be too high. It was easier to have something that they had to react to. And if they were not going to do it, they had to actively sell these things. Now, as it turned out--and this is a real caveat--they never really were real interested in it. I think the reason was it's too complex, and in a way, even though this brought it down to their scale, for them at least it didn't really work. And we didn't keep that going for very long. When they got to be old enough, where they were no longer interested in having their savings monitored on my computer and wanted their own debit cards and accounts at the bank, which happened when they turned 12, what I did was I started a money market fund that paid 6% a year, and let them keep excess money in that. So, they had a better return than they could get at the bank, so they still had an incentive to save; but it was a little closer to what the market rate was then; and that they were okay with. The stock market never really appealed to them. Russ: It probably varies by kids. Guest: I think it does. Russ: Some kids would find it very interesting. And I think, going back to your earlier discussion of what's wrong with the current system, you made some reference to doing it for a living or investing as a grownup; but of course a lot of these stock market competitions are sponsored by brokerage houses who profit from having people buy individual shares of stock. And so what these competitions do is encourage people to put all their eggs in one basket--the opposite of what you want. It encourages individual stock purchases. I don't think you can buy a mutual fund and if you did you are unlikely to win because somebody's going to take a shot at the one-month--there's no downside--so you might as well take a shot at the high flyer and hope you can win. That's your best shot of winning. Anything that gets them away from that. Your scheme was a little bit elaborate, and though I think some kids would be more interested than your kids were, it's still a lot of work for the parent to keep track of dividends and capital gains and all that. But anything that teaches them the value--and to me, there's only one thing you want to teach your children about the stock market, that you don't put all your eggs in one basket. Actually, I'd say two things: Don't put all your eggs in one basket and don't listen to Uncle Ned who's got a great stock that he thinks is going to go through the roof. That you can lose money. Those are the two, really, I think, crucial lessons. And you really don't want to learn those as an adult with lots of money. You want to learn them when you are younger. And so I think whether you do it through a mock stock exchange like you did, even if they weren't so interested, or if you lecture them relentlessly, as I do, about the virtues of diversification and indexed mutual funds, which I think on average do pretty well, although this is not investment advice. Returns can vary, and consult your investment advisor before making any decisions. This is not an investment show. But I do think diversification is a really good idea. I think the other key lesson, which unfortunately our children are learning, is humility. That things don't just keep going up. I always think about my parents who grew up--my Dad was born in 1930 and my Mom was born in 1932, so they were children of the Great Depression. Their parents struggled, as did their relatives, most of them. Some people moved in with the one relative who was doing pretty well. And my Dad got a lifelong aversion to equities, to stocks, that I don't think was particularly healthy. But that's what he learned, and it stuck with him. Because he heard his parents and uncles and aunts moaning their stock losses. And our kids right now are growing up in the time of this so-called Great Recession, and they are learning a lesson that markets don't always go up. Now, whether they remember that 40 years from now after 15 years of golden returns, who knows. But I think if I had to teach my kids one important lesson it would be the dangers of hubris--oh, I know what's going to happen and this portfolio has always done well so it will continue to do well. Those kind of lessons, being aware of the dangers of that I think are the most important things.

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Guest: Exactly. And the place where my son learned the most valuable lesson about the stock market didn't involve the stock market at all. It involved beanie babies. Russ: Yeah, tell that story. It's a great story. Guest: Little collectable toys became an extraordinary fad when my son was in about 4th grade. And the boys and girls were collecting them. The girls collected them sort of as adorable things. The boys all were very market oriented in their beanie baby collecting. Russ: They were evil speculators. Guest: They were. And they had these investors' guides to the market value, beanie babies, could calculate their net worth from day to day. And I would give them the standard lecture, saying: These are not scarce; they are making more of them every second. And there's no intrinsic value here; this is all mania and you are not, they are not even worth the $6 or $7 dollars that you paid for each one, and so forth. All on deaf ears, because they had these books and they were looking at them. And then a day came when my son felt he needed some money and he told me he was going to sell a couple of his more valuable beanie babies on e-bay; and I thought: Ah, this is perfect. He will learn now what I've been telling him; hypothetically he'll see for himself how foolish this is. And so he put a pair of beanie baby bears for sale on e-bay. And these are ones he'd been throwing around the house and the yard even. He described their condition as "mint." Russ: Fraud. Guest: Fraud. And put them for sale on e-bay. Seven days later they sold for $120.50. To my horror. But I was still thinking there's a lesson here that we are going to learn very soon, and I helped him box them up, warning him not to be disappointed if the buyer angrily demanded her money back, which was what I was pretty sure was going to happen. Russ: Because of their condition. Guest: And just buyer's remorse; their condition. I would have by then thought that. But a few days later the buyer sent my son an effusive email saying she was thrilled with her purchase. So, I said to him I wasn't going to give you any more financial advice. I'm going to give you one more, and that is: Sell your entire collection immediately. And he didn't because they were too valuable and markets can go only up. And he's 24 now; he still regrets this thi ng that happened when he was 8, that he hadn't sold his entire collection. Russ: Yeah. He's still waiting. Guest: He's still waiting for them to be worth $.05. But I think that's a--he learned the same lesson that grownups did in the late 1990s, which is that the stock market doesn't always go up. But he learned it at a very low cost. He saw both ends of a bubble that had basically no effect on his life except to make this permanent lesson that this doesn't happen. In fact, one of my favorite lines in "The Onion" a number of years later was something like: Americans Demand New Bubble to Invest In. But that was an enduring lesson that came from this sort of, evolved all by itself, and came from what I initially thought was a foolish activity. And was a good example of why kids should have some flak to do things that you think are stupid, not only because they might turn out in the end not to be as stupid as you think it is, and then fortunately turn out after that to be every bit as stupid as you thought it was. It gives them the responsibility of, the possibility of seeing this. E-bay was useful, I think, and it still is a useful teaching tool for kids, because one of the things our kids can learn is their possessions have value. They have capital. They have this bicycle. These toys have value. They didn't really have them before. On e-bay, though, you can sell something. Here's this game I had that was given to me; but if I take good care of it, I may be able to get some money back by selling it on e-bay. I think that was a valuable lesson, too. It changed my kids' ideas about their possessions. Suddenly their things began to look like assets to them rather than just sort of the litter in their room. And they were more careful with their stuff.

38:17

Russ: Yeah; that's very cool. You mentioned how they would take the packaging and instead of just trashing it they'd save it in case they wanted to sell later. Not a bad lesson in life. Although it does require a larger house as you get older. The first part of that story, to your horror--your son received a check for over $100--reminds me of a really wonderful Somerset Maugham short story called "The Facts of Life." If you haven't read it out there, go Google it or find it. The second part reminds me, along with the first part, about the role of supply and demand. It seems that supply and demand are very useful things for children to understand; in particular, about the supply and demand of labor and how wages get determined. As I was reading your book I was thinking of a story I read recently, where a woman, tired of being a waitress, decides she's sick of people demanding stuff of her; she wasn't making a lot of money, she wanted to be a writer, it wasn't happening. And she decided she didn't want to be in the service business any more. So, she's taken yoga all her adult or semi-adult life, and so she decides: Well, she looks at the yoga instructor and thinks, Well, this is a good job. You get to come to work in your pajamas. It's not that hard. And it's kind of spiritual, and you probably make good money. And so she went and took a training class in being a yoga instructor, only to find that after finishing the class she couldn't find much work. And when she did, it didn't pay very well. And that she was still in the service business; and she was still catering to people. And those lessons really are important lessons to learn about how the world works. If something is relatively easy to do and pleasant, it's not going to pay very much. It's just the way of the world. If you want to make a lot of money, which is by itself maybe not the best of all, but if you want a certain level of comfort, you've got to have a skill, and it has to be acquired with some effort. Otherwise lots of other people will acquire it and they won't pay very well. And if you are like a lot of other people, you have to stand out. You have to cater better than the other ones, do something extra, a way to deliver the yoga class other than the way people just do it like everybody else. Otherwise you'll just earn what everybody else earns. So, those kind of lessons seem to me--those are pretty useful. Guest: Yes, those are very useful. If I could have become an introduction to economists, I would have. I took Introductory Economics in college when I was a freshman. I just felt as though it explained everything. Introductory Economics is really psychology. It's a course in psychology. Russ: The way people behave. Guest: Exactly. Human behavior. Unfortunately, economics goes beyond introductory economics, in that as soon as it got to the statistics part I realized that I wasn't cut out for it. In fact, I wouldn't mind majoring in the introductory level of almost anything. Those were always my favorite courses in college. But I think that a good beginning, a good college economics textbook explains much of what you need to know about human nature. Geopolitics, and everything. It seems, I thought--I still think that was the most valuable course I took and the one that made the most dramatic change in the way I thought about things. And I ended up as an English major. Russ: The late, great Paul Heyne, a wonderful teacher, writer, and economist, made a distinction between the poetry and prose of economy. The principles is the poetry. That's what makes you fall in love with economics. It's the art of it, the magic of it, the way of looking at the world in the way you haven't thought about it before. It hooks you. Th en you get into the prose, you get into the math, you get into the graphs; and I think most of the value is in the poetry, myself. What I find interesting is how many introductory classes I took in college that didn't have any poetry. They were just dumbed-down versions of the most prosaic graduate level stuff, then spoon-fed to us as undergraduates. But the stuff that changed your life, the stuff that changed your world--those classes, yeah, take that introductory philosophy class, poetry class, economics class. Those were phenomenal. And they are well taught. But they can be badly taught, too.

42:35

Russ: Let's move to the last part of the book, which is a discussion of what gives life its meaning, and what's of true value, and where does true wealth come from. What role does money play in those things? You have some interesting ideas about what children should start to think about. Guest: Well, I think the main thing is that money is not unimportant, as people sometimes say when they talk about enjoyment of life, or about what's meaningful about life. Money is extraordinarily useful. It's a tool you can use to finance your wonderful life. Money leaves people and their problems--there isn't enough of it, you spend time in a panic when you buy medicine for your children, whether there is too little to allow you to think about anything else. And then also when it becomes an end in itself, when it becomes all-consuming. Greed is not good. Greed is like an addiction; it's like a drug. Because you can never satisfy it. So, I think that the healthy attitude about money is that it's a tool, it's a necessary tool, that you use to make yourself happy. And I began thinking about the difference, an idea different from net worth--which is the way we usually think about ourselves or often think about ourselves--and something that I think I called true net value, or something like that. True net worth. Which has to do with your satisfaction in life. And the thought that occurred to me was: We're never going to have as much money as Bill Gates does, but on an hour-for-hour basis it's entirely possible to take as much satisfaction from life as Bill Gates does. If you think of your life in that way. Russ: And maybe a lot more. Guest: And maybe a lot more. Certainly when he's being grilled by government officials or angry shareholders or just involved in all the challenges he gets stuck in. If we can be sort of clear-eyed about what we get stuck in in our lives, that makes us satisfied, makes us happy, and figure out what it takes to do those things, it's a much simpler problem. You see it when this rational behavior takes place, whenever there is a huge national lottery--I don't know what the threshold is that makes people think they should be driving across state lines to buy a lottery ticket. $500 million or $300 million. I think that's the crazy way to think about money. Even though I think we'd all be happy if we had our own jet, there are different ways to think about it and to make our lives better for ourselves. Russ: And you talk about the different skills and attributes that we think are also true, and our connections to other people--those are our true measures of wealth and happiness, and where we get our deepest satisfactions that endure, that are not short-lived, that don't just vanish when the tomahawk breaks or when your latest device doesn't sink. Or whatever it is. Guest: One way to think about that is what you would imagine a fire or some other disaster destroying the kind of physical manifestations of your life. What would you save if you could save a boxful? And not just objects, but what would you put in your box from your life, what makes you happy? And my own is not very imaginative: it's probably that life is things that make you the happiest. Aside from family, the obligatory children, life, dog, etc., it's playing golf; when I think about staying healthy it's because I want to keep playing golf as long as I can. When I think about earning money, it's often because I can do this; then I can take this golf trip with my friends. If you think of things that way, it's a very simple thing, but it's a useful way to think about your life and to focus on what's actually important. I think for me it was this idea of how do I maximize my satisfaction not on an hourly basis, on an income basis. Russ: I would say it's the scarcest thing we own, is our time. We often use it so badly. No one on his deathbed wishes he'd spent more time at the office. And it's just very hard to do that balance.

47:50

Russ: I'm going to interrupt for a second; I'm going to read a very short poem. Which, you don't allude to the poem, but you allude to the sentiment. It's by Franklin P. A dams; it's called "The Rich Man". Franklin P. Adams wrote I think two poems that were noteworthy. One was one that immortalized Tinkers to Evers to Chance, double-play combination; but the other was this poem, "The Rich Man." It's short.

The rich man has his motor-car,
His country and his town estate.
He smokes a fifty-cent cigar
And jeers at Fate.

He frivols through the livelong day,
He knows not Poverty, her pinch.
His lot seems light, his heart seems gay;
He has a cinch.

Yet though my lamp burns low and dim,
Though I must slave for livelihood--
Think you that I would change with him?
You bet I would!

Yeah, so, we have that urge to swap. We wish, we think if we were like Bill Gates we'd be happy all the time. And most of us do try to acquire more money rather than less. But we do also find out that it's not the source of happiness. But without it, it's tough. And I think that balance is really what you talk about in the book and that we are talking about right now. Guest: Right. It's, uh, somehow making yourself have an understanding, a clear understanding, of sufficiency. And I think that sufficiency is often the key to maximizing happiness. I don't think, you don't want to be, well, over my life and my family's life up to the time I'm 65. People get struck down at the age of 64. And so you don't necessarily want to put all your chips on a square that you may not get to. It's better to think about these things as you go along. It's an impossible balance no matter how much you think about it. It's hard to do the right thing; and then life has a way of throwing things at you that you didn't count on and that you didn't calculate. Russ: But certainly we treat our own careers, and how we talk about them, and how we treat money in our families, affects our kids. Our kids are watching all the time. And that's how we talk and what we do, are the two things that educate them. Guest: Very true. We talk about teaching our kids about money constantly. And not necessarily the lessons we want them to learn. When you sweat over credit card balances; when you are afraid to answer the phone because you think it might be a collection card agency; when you come home from work and you are angry or pour yourself a big drink or complain about what happens--all these things, we are teaching kids about money. And so, it's worth it--valuable to ourselves to step outside and look at these things and think about how we are doing. There was an interesting study recently--I'll probably get it wrong, but people made more intelligent decisions about their retirement savings when they were looking at a picture of themselves, artificially aged--looked like they were retirement age. It became tangible to them. It's probably not a bad way to think about all kinds of things in your life, if you can really force yourself to suspend your disbelief in immortality and realize that time eventually runs out and think that is this the way to allocate my time during this extraordinary gift of being alive. Russ: Couldn't agree with you more.

51:36

Russ: The book ends with a rather, what seems to be a little bit of a change of pace, a little bit off the topic; but I saw it as you did, very much in the same theme. I would describe it as the best investment you can make in your kids and for your kids. I think modern parents are obsessed with their kids' getting into college, and the best college. As someone who works in the kitchen I'm not as enamored as brand names as some of my friends are. But, we spend, modern parents who are financially comfortable, spend a lot of time and those who aren't even spend a lot of time: How am I going to get my kids to have as good a life as I have, ideally better? We love our children; we want them to do well; and we've been talking about what we might do to help them understand money. Which is a very useful thing to do. But at the end of the book, you talk about a very different investment, which is reading to your kids. This was one part of the book which I agreed with 100 or more percent. About practice and ideals. So, talk about why you think that's important and how to do it. Guest: Well, I think it's important because the easiest way to give kids a solid intellectual education in school is to help them become good readers, and the easiest way to help them become good readers from when they are very young and as long as they can stand it. It gets them--you get them addicted to books. And I think it lasts for the whole life. Russ: Now, I like this especially, "as long as they can stand it." Because I think most people feel you read them a few picture books when they are 3 or 4 and you've done your time; but some of the most satisfying reading I've done to my kids was when they were 10 and 12 and older. I love reading to my kids. They don't always want to hear it. Guest: If you start young, I think they tolerate it for longer than if you suddenly started when they were 12 or 13. But if you started when they were very little, before they had any comprehension of what you were saying to them, they see it. And actually nowadays we are much better at understanding the value just because audio books have become a part of our lives. Anybody who commutes in the car--we enjoy being read to. And it's valuable, I think, for this practical reason. You turn kids, it helps them become good readers on their own. But I think it also, it's just an easy, kind of satisfying kind of family glue, reading to kids. It's therapeutic. I saw this with friends of my children when they were young, who were unmanageable until you started reading to them. They calmed down, they put their thumb in their mouth. Kids like being read to. And if you do it, you create this sort of very strong bond that they respond. That you respond to. It's one of the things I loved about kids. I discovered that here was this opportunity to re-read these books that I had loved as a child, and also discover new ones that I hadn't. That children's literature, especially as you get older, beats almost anything on the adult shelf. There are huge benefits to the parents, too. And what my wife and found was it becomes a family activity. Going off hitting all the libraries in our region so that we could, once we'd exhausted all the nearest libraries. There's always something you could do. And then when we traveled, our kids were always well-behaved on the plane, big canvas bean bags full of books. People were always asking us: Are you teachers? There could be no other explanation for doing this. And you see, I just came back from Scotland and from Ireland, and I'm always amazed to see parents get on a plane with a 4-year-old with nothing, expecting the child to entertain himself, in his mind, I guess, for a six or seven hour flight. It's not possible. They are not going to be happy looking at the SkyMall catalog. Reading is better. Russ: The other you did mention, that I'd encourage people who are listening is to read your kids hard books. Not just easy ones. When they are little you read them easy ones and they learn them by heart. They are the most glorious and sometimes the most frustrating parts of being a parent, is the 700th reading of The Dot and the Line or Harold and the Purple Crayon, my kids loved Curious George, which my wife didn't, and I always ended up being the Curious George reader. And it's funny I mentioned The Dot and the Line--it's not really a children's book, but I thought of it when I was trying to think of Harold and the Purple Crayon. But when they get older, I would read them harder books that they couldn't always understand. And sometimes I would explain them, and sometimes I wouldn't. We read, I think I probably mentioned before--we read P. G. Wodehouse, Joy in the Morning, which I think is an entertaining book that I would recommend. I read it to my 9, 11, and 10-year old sons before we went to bed every night. It shocked me that we got through it. It held their attention. We talked about it. The characters became vivid. And I also read my kids sometimes Homer's The Odyssey, in the Fagles translation, which is very hard. But if you pick the juicy parts, where they poke his eye out with a burning log or the scene where Ulysses returns home confronted by Penelope's suitors and unmasks himself and reveals he's Ulysses, and they are scared out their minds; and he takes this bow that no one in the room could bend and he bends it, strings it, fires away--it's straight out of a modern movie. And my kids just ate it up. They didn't understand every word. I'm sure I didn't understand every word. But the cadence was good. And while I'm on this soapbox, poetry is just a really great thing to read to kids. Especially poets like Kipling, and Robert Service, who had great rhythms and rhymes. Kids wouldn't remember those poems otherwise. Guest: Extremely. Very true. I a million percent agree with reading hard books. Even when 2 or 3. Maybe not quite that young. Three or four, say. I read Treasure Island, Robert Louis Stevenson. It's very hard. Seemingly confusing. But I could see, he was playing. Kids often need to be doing something while you are reading to them. And if you say: Get back over here on the couch!--they can't necessarily always do that. Some of my favorite times with the kids were when they were doing something else. When he was building something with Lego. And I remember reading him Treasure Island when he was seemingly completely too young to understand it. And I would see him pause, Lego pieces in the air, as he was listening to some tense moment. And so, he was listening all the time. My daughter used to--she began reading very early. I was reading a book to my son, and she was lying in the bed reading a different book herself but was listening and would comment occasionally. Russ: Stevenson's prose style. Guest: I think that's another value of reading to kids--they become good listeners. And I think the reason your kids could understand books that were way over reading level for them is that they learnt to--by listening all along. I think it's a huge skill. It makes them better readers and better writers. We learn to write by absorbing the language by listening. Writing is a huge skill. I've sure you've seen it in economics. It's huge and not necessarily a common skill. And it underlies almost everything. One of my early books had to do with a sort of an expose of a testing service--SAT and other standardized tests. One of the little-known facts was the math SAT is very much a verbal test, too, because you have to be able to read. It's a language test, a vocabulary test, in addition. And that's true in every subject. You don't get a pass on reading just because you are going to go into the sciences. All the same literary skills are just as important there. Russ: Reading is everything. I don't really think of it anymore as reading. The world has changed so much it's really a--growth as a human being is about absorbing new information and learning, and reading is the most common way it's been done in the past. People used to tell stories. Now we tell stories--for a while we called them through the printed page, and then it's became the audio book and now it's the Internet; and iPad, and everything is exploding. But it's all about slowing your life down so you can absorb information. And if you can't do that, your life is going to be hard. It's really important. Guest: Yeah. Your most important software is your language ability, what distinguishes us from who knows what. It's very true. There are lots of different ways to cultivate that. If we think of: How do I invest in my children, things like that, it's more important to do something like that than to think about building your estate so they can go off and squander it somewhere. You want to-- Russ: Teach them how to learn. Guest: Teach them how to learn. How to enjoy. How to be content within themselves, to entertain themselves. A powerful tool, especially if you have young children. I remember when there was this great breakthrough--it just felt like the most extraordinary thing. My wife and I were driving on a trip with our kids, and our daughter, in our back seat, was reading to her brother. It was like we had invented a perpetual motion machine. After an investment of a few years, now they could read to each other. There we were in the front seat quietly having a conversation to ourselves.

Re reading to your children - what do Owen and Roberts do with the fact (as reported by Dubner and Levitt) that the Early Childhood Longitudinal Study shows no correlation between reading to your kids and test scores through fifth grade?

Tried today with my 7 year old. Offered him to give me his money and I would give him back 5% more for each month if money stay with me. So I precisely reproduced what David had done to his kids. I was shocked by the results. I had never seriously discussed money issues with my kids before. My son attended my offer with extreme interest. Asked a few very sensible questions and then proposed: You know, Dad, I will give you some (a part) of my money. He was cautious and excited at the same time. And he took it with all seriousness.

Thank you, David! You described a very simple idea. But I would have never come to it without you.

Russ - no argument from me that there are rewards to reading to your kids apart from stimulating intellectual growth. We have four kids, I've read to all of them, and it was a wonderful thing to do with them.

However, I don't think it helped them with their own reading skills, which is what you and Mr. Owen were suggesting it would do.

Doesn't this teach children to treat banks and financial institutions as excessively safe? What about teaching them the need to worry about actually getting their money back from a 'great' investment opportunity. 5% a month sounds like a Ponzi scheme to me.

(this is a joke, I thought the podcast was wonderful; I DO wonder how on earth I'll teach my kids how to navigate the nastier parts of the financial world)

The key lessons for children are that there is no such thing as a free lunch, if it sounds too good to be true then it probably isn't true. and don't put all your eggs in one basket. You could add that just because something went up yesterday, it won't go up tomorrow.

These are really all one lesson: don't be a sucker. To really drive it home, have them read Fooled by Randomness by Taleb and they should be OK.

One point of contention I have though is the potential to teach similar lessons through trading cards. I recognize that it was merely an example and everyone has different experiences, hence I thought I'd share my own.

Growing up my Dad and I spent a lot of time collecting sports cards. At card shows I was given a limited amount to spend, maybe $20. With upwards of 50 different vendors, I had to be picky about spending. Many vendors would have large boxes of cards for $1 each, often with deals like 6 for $5. I realized that finding specific players and cards in this manner was generally superior to purchasing random packs. In the end I would spend hours sorting through boxes and looking up prices in a Beckett to find the best values for my limited cash.

On a related note, looking up values and seeing frequent fluctuations in the monthly Beckett provided a good background for understanding how emotions can drive prices.

Way long ago, before kids had money(your dad may remember, Russ), we played three card poker(was it called Monte?) for Dixie Cup lids, the kind that had celebrities on the inside and a protective cover that had to be peeled off to see. The play proceeded in an orderly fashion on the step landings of our South Philly row houses until the day that a more adventurous, and roving, kid found where in the the dump, Harbirson Diary dumped their refuse and discovered Dixie Cup lids by the handfuls. They needed only to be washed and peeled to be rendered "legal tender" and forever changed the games from one or two lid antes and betting commensurate with stash held together by rubber bands. Soon the secret was out and kids showed up with Cigar Box stashes and betting escalated to numbers which eventually render the games no fun.

Which raises the related question, is it true that the US Reserve Bank holds as assets a sufficient number in the way of Euros that makes the European problems as much ours and Germany's? Can we ever know the answer to this question?

A charming and thought provoking podcast, Russ. As a father of a three month old, I found it very stimulating (I'm pleased to a bit of time to ponder the ideas before putting them into practice).

But what makes me write is your final intervention on reading. When you and your guest were advocating reading to your kids I was thinking 'I'd love it if I read Wodehouse to Henry when he's older; I wonder if he would enjoy it'. And then a mere minute later you spoke of your success with Joy in the Morning. However, my first instinct would be Code of the Woosters -- looks like I have an excuse to reread my Wodehouse collection to find which is the most kid friendly!

Once in the grocery store, my daughter asked "How come they never run out of milk." I was thrilled and resisted the urge to lecture. I can teach her in small bites. I hope to take her to a dairy and start from the beginning.

Marginal utility may explain John Berg's loss of interest in three card monte for dixie cup lids. As a kid I read comics and had a similar experience as Woj (sports cards) at the local book exchange. I discovered though that when I began 'collecting' I soon lost interest. Just enjoying the art, stories and characters I liked was what made them valuable to me.

Is there a podcast on Brooks' Gross National Happiness? Thanks Mr. Owen, and thanks again Russ; you're the best. Just finished Around the World in 80 days with my daughter. Hope to begin Gullivers' Travels soon.

I am concerned my point may have been missed and I thought it may have been more important to teach the young than the other lessons in the podcast.

Has the Feds monetized our public debt to buy European Central Banks debts and consequently secretly exacerbated our grandchildren's debt burden, perhaps even preventing possible solutions for which they may have opted?

Perhaps David's children were not terribly interested in the simulated stock market, not only because it required extra work but also because they were getting such a high risk free rate from the bank of Dad.

Loved this podcast. Excellent interview as always. Trying to incentivize our own children to save and squirrel, so this is really helpful. We are using "behavior bucks" right now (a few days before going to an amusement park, where they will spend the money; so they're incentivized in the near term), and my kids are asking, "What else can I do to earn bucks?" (an unusual attitude)

Q for David: Do you produce or recommend an app for keeping track? (By the way, there is an app on the iTunes store actually called "Bank of Dad" but it doesn't allow you to calculate interest, according to the reviews.)

The "genetic" question is quite interesting. This could be studied in various ways, e.g., using personality inventories (and probably has been).

Thank you for this and for all of your podcasts.
When I discovered your podcasts I immediately was consumed with the notion of changing careers and becoming an economist but alas, I lack the skills for the "prose" of economics; it's the poetry that fascinates me. But unfortunately as Mr. Owen says there's no way to really major in or make a living at "Introduction to Economics."

I don't have children but I am going to get the book for myself and also for a couple who is expecting a baby. They won't be able to use the advice for several years but I'm confident they will love it.

Mr. Owen's comment about thinking about the "things" you would take if your house were burning down was especially eye-opening. Often we think of these things as, of course, the people we love, and then the actual tangible possessions, but Mr. Owen's counsel to think of it more abstractly (for him it is golf) is invaluable.

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